How to Get Real Social Security: Tom Miller Article in Reader’s Digest

Published in Reader’s Digest

December 1998

“Am I ever going to see that money again?” asks Brian Schumacher, 33, of Charleston, S.C. Every payday the retail manager watches Social Security payroll taxes (excluding Medicare) take a 6.2-percent bite from his $25,000 salary. His 30-year-old wife, Tina, an assistant teacher in a day-care center, is clipped at the same rate on her annual wages of $8000. The Schumachers’ total: more than $2000 a year. Their employers are required to kick in matching tax payments.

But the Schumachers are worried. Social Security is officially projected to be insolvent by 2032––about the time they hope to retire. If nothing is done, the prospects for their children, nine-year-old Michael and ten-month-old Mary, are even bleaker: they will likely pay more into the system than they will ever get back. “Social Security is outdated,” says Brian. “We need something different that puts your money to work for you.”

 Like many Americans, the Schumachers have come to realize that the six-decade-old Social Security system needs a major overhaul. In roughly 15 years, outgoing checks will start to exceed incoming tax payments. Over the long term, retirement-benefit promises outstrip projected revenues by trillions of dollars.

Can’t we just fix Social Security with some modest tax increases and benefit reductions? The answer is simple: been there, done that. In 1977 and again in 1983, payroll tax rates were increased, and future benefit growth was slowed. But Social Security’s financial problems have come back with a vengeance.

Social Security officials have repeatedly had to advance the projected date of the program’s insolvency, from a 1983 forecast of 2063 to the current one of 2032. To fill this fiscal hole by conventional means would require an immediate hike of the combined Social Security payroll tax rates by almost 18 percent (from 12.4 percent to 14.6 percent), or a reduction of projected benefit levels by more than 14 percent, or some combination of the two.

This would not only be a job and growth killer. It would also make a bad retirement deal for younger workers even worse.

Can’t we do better than this—a bad deal that we can’t even afford? One of the most attractive solutions is privatization. Plans differ, but commonly propose that younger workers would gradually shift their payroll taxes into private retirement accounts similar to 401(k) plans. A transition period would protect current retirees and people near retirement.

Privatization would enable people to build much larger nest eggs. If over your working life you invest an amount equal to your Social Security taxes, your likely return would far outstrip what Social Security promises. (See “Check Your Benefits,” page 74.)

In Congress, both parties have spoken out for privatization. Private plans have already replaced or supplemented foundering government-pension systems in Great Britain, Australia, Mexico, Chile and other Latin American countries.

Nevertheless, a lot is at stake—and many people have questions. Here are some of the most important:

Isn’t the market too risky for my savings? Skeptics worry that Americans won’t know how to handle investment options. But millions of Americans have become more familiar with investing, through IRAs, 401(k) plans and mutual funds.

To be sure, market downturns do occur. However, in every 15-year period since 1926, stock returns have been positive. Our economy’s long-term resilience means younger workers would have time to recover from any downturns. And, as William Shipman of State Street Global Advisors points out, retirees and people near retirement can and do put more savings in less risky classes of investments, such as bonds and money-market instruments.

We shouldn’t forget that Social Security itself has risks. The program is already facing insolvency. Any major economic downturn would lower payroll-tax revenues, further jeopardizing the current system.

Won’t a privatized system hurt the poor? Because retirees’ benefits would be based on their investments, some worry that the poor would not fare well in a privatized system. Actually, they should fare better.

Low-income Americans tend to start work at younger ages and pay Social Security taxes earlier. They also tend to die younger. As a result, many receive few Social Security benefits—or none at all. In contrast, privatization offers people the opportunity to save for themselves part of what they now pay to Social Security—and to accumulate wealth that, unlike Social Security benefits, their children could inherit.

In addition, most privatization plans provide a safety net. For example, after Australia’s social-security system was reformed a decade ago to rely on private savings, it guaranteed all retirees a pension that would at least match what they would have received under the original government-run system.

How do we make the transition? No transition will be painless, but fortunately the change to a privatized system doesn’t have to be accomplished overnight.

In the early years only a portion of a wage-earner’s payroll taxes would be available for individual investment; most would still be collected to cover current retirees’ benefits. Then, as personal savings accumulate over the years, people would meet their retirement needs more through private funds and less from Social Security.

Even so, during the transition period some fraction of retirement- benefit costs would have to be met through federal borrowing. After all, the current system has already dug us into a hole as deep as $9 trillion of unfunded liabilities. But by providing more investment funds to grow the economy, privatization would help pay down that debt.

After Great Britain restructured its government pension system, private retirement savings grew, while future public-pension liabilities grew only at a negligible rate. Partly as a result, it is estimated that Britain may pay off its entire national debt by 2030.

What about today’s seniors? Retirees and those nearing retirement are relying on Social Security. That’s the point of a transition plan—to honor existing obligations.

Actually, privatization would make those benefits more secure. Social Security benefits have already been cut several times. The 1983 legislation, for example, raised the retirement age and subjected a portion of retirement benefits to income taxes. Unless the system’s finances are stabilized, there will be more cuts.

By the way, under the current system, when a retiree dies, the surviving spouse absorbs an automatic 33-percent reduction in total retirement benefits. In a privatized system, that wouldn’t happen. The survivor simply inherits the retirement accounts of the deceased spouse. Moreover, the survivor can draw on his or her own accounts.

In 1945 Arthur Altmeyer, chairman of the Social Security Board that later became the Social Security Administration, warned Congress that “it is inequitable to compel [workers] to pay more under this system than they would pay to a private insurance company.” But that’s just what we do today. In fact, increasing numbers of people are paying more than they can ever hope to receive in benefits.

The only way to turn this around is to reform Social Security as soon as possible. The rewards will be ample when our hopes overcome our fears.

Tom Miller is the director of economic policy studies at the Competitive Enterprise Institute, a Washington, D.C., think tank.

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